SEC Formalizes Dodd-Frank Rules on Whistle-Blowers

The Security and Exchange Commission on May 25 adopted new rules that expand its authority to reward individual whistle-blowers, offering financial incentives for individuals to report possible violations of securities laws.

Authorized by the Dodd-Frank Wall Street Reform and Consumer Protection Act, the program “is intended to break the silence of those who see a wrong,” SEC chairwoman Mary Schapiro said at an open hearing May 25, when commissioners voted 3-2 in favor of the program.

Awards under the new program will depend on the quality and timeliness of the information, which must lead to successful enforcement actions with sanctions of at least $1 million.

Before the act, the agency’s bounty program was limited to insider-trading cases, with awards capped at 10 percent of the penalties collected.

The new rules allow auditors, lawyers and internal compliance personnel to collect rewards only under unusual circumstances in which there is the risk of substantial financial risk or the whistle-blower believes the entity will impede an SEC investigation.

The new program “strikes the correct balance” between encouraging people to use their internal compliance procedures and letting them come straight to the SEC, Schapiro said at the hearing.

The rule takes effect 60 days after publication in the Federal Register.